Transboundary capital and pollution flows and the emergence of regional inequalities

Athens University of Economics and Business, Department of International and European Economic Studies, 76 Patission Street, 104 34 Athens, Greece

We are pleased to dedicate this to Stephen Cantrell on the occasion of his 60th birthday

Received
June 2015Revised
August 2015Published
December 2016

Fund Project:
Beijer Institute of Ecological Economics Fellow, and RFF University Fellow. Levin acknowledges that funding was provided by the National Science Foundation grants GEO-1211972 and
OCE-1426746, and by the Nordforsk-funded project Green Growth Based on Marine Resources:
Ecological and Socio-Economic Constraints (GreenMAR)..
Beijer Institute of Ecological Economics Fellow. Xepapadeas acknowledges that his research has
been co-financed by the European Social Fund –and Greek national funds through the Research
Funding Program: Excellence(ARISTEIA) –AUEB "Spatiotemporal-Dynamics in Economics.".

We seek to explain the emergence of spatial heterogeneity regarding development and pollution on the basis of interactions associated with the movement of capital and polluting activities from one economy to another. We use a simple dynamical model describing capital accumulation along the lines of a fixed-savings-ratio Solow-type model capable of producing endogenous growth and convergence behavior, and pollution accumulation in each country with pollution diffusion between countries or regions. The basic mechanism underlying the movements of capital across space is the quest for locations where the marginal productivity of capital is relatively higher than the productivity at the location of origin. The notion that capital moves to locations of relatively higher productivity but not necessarily from locations of high concentration to locations of low concentration, does not face difficulties associated with the Lucas paradox. We show that, for a wide range of capital and pollution rates of flow, spatial heterogeneity emerges even between two economies with identical fundamental structures. These results can be interpreted as suggesting that the neoclassical convergence hypothesis might not hold under differential rates of flow of capital and polluting activities among countries of the same fundamental structure.